Do These 3 Checks Before Buying Genie Energy Ltd. (NYSE:GNE) For Its Upcoming Dividend

Genie Energy Ltd. (NYSE:GNE) stock is about to trade ex-dividend in 3 days. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. This means that investors who purchase Genie Energy's shares on or after the 18th of February will not receive the dividend, which will be paid on the 26th of February.

The company's upcoming dividend is US$0.075 a share, following on from the last 12 months, when the company distributed a total of US$0.30 per share to shareholders. Based on the last year's worth of payments, Genie Energy has a trailing yield of 2.1% on the current stock price of US$14.17. If you buy this business for its dividend, you should have an idea of whether Genie Energy's dividend is reliable and sustainable. So we need to investigate whether Genie Energy can afford its dividend, and if the dividend could grow.

View our latest analysis for Genie Energy

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. An unusually high payout ratio of 235% of its profit suggests something is happening other than the usual distribution of profits to shareholders. A useful secondary check can be to evaluate whether Genie Energy generated enough free cash flow to afford its dividend. The good news is it paid out just 15% of its free cash flow in the last year.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Genie Energy fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.

Click here to see how much of its profit Genie Energy paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Genie Energy's earnings per share have plummeted approximately 32% a year over the previous five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Genie Energy has delivered an average of 2.3% per year annual increase in its dividend, based on the past 10 years of dividend payments. The only way to pay higher dividends when earnings are shrinking is either to pay out a larger percentage of profits, spend cash from the balance sheet, or borrow the money. Genie Energy is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

The Bottom Line

From a dividend perspective, should investors buy or avoid Genie Energy? It's never great to see earnings per share declining, especially when a company is paying out 235% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. Bottom line: Genie Energy has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

So if you're still interested in Genie Energy despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. For example, we've found 4 warning signs for Genie Energy that we recommend you consider before investing in the business.

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.